Fundamental Analysis

Equities Pull Back on Hawkish Remarks from Fed Policymakers

  • Investors remain cautious ahead of important inflation data.
  • Tokyo’s core consumer prices increased faster than anticipated (by 4.0%) in December.
  • Investors are anticipating remarks from Fed Chair Jerome Powell.

Equities futures prices declined on Tuesday following hawkish remarks by two US Federal Reserve officials. Investors were also wary ahead of important inflation data.

“Equity market caution was the dominant theme overnight as markets erased gains following two Fed officials’ hawkish remarks. According to Raphael Bostic and Mary Daly, the Fed will probably increase interest rates to levels above 5% and maintain them there for a while, ” Commerzbank stated in a client note.

President of the Atlanta Fed Bank, Bostic, stated that he would have to consider a quarter-point rise more seriously and proceed in that direction if US consumer pricing data supports the cooling indicated in the most recent monthly jobs report.

Tokyo Core CPI (Source: Refinitiv Datastream)
Tokyo Core CPI (Source: Refinitiv Datastream)

Elsewhere, Tokyo’s core consumer prices increased faster than anticipated (by 4.0%) in December compared to a year earlier. This supports market views that the Bank of Japan may gradually wind down its enormous stimulus program by changing its yield curve control strategy.

The increase in the Tokyo CPI increases the chances that December’s national consumer inflation rate will have exceeded the BOJ’s 2% target.

The S&P 500 index gave up early gains to settle virtually flat on Monday as persistent concerns about inflation overshadowed expectations that the Federal Reserve will be less aggressive in raising interest rates.

Investors are anticipating remarks from Fed Chair Jerome Powell on Tuesday. According to some strategists, Powell may indicate that more time is required to demonstrate that inflation is under control.

According to money market bets, the odds of a 25-basis point hike at the Fed’s policy meeting in February were 77%.

According to Quincy Krosby, chief global strategist at LPL Financial in Charlotte, North Carolina, the report on consumer prices due on Thursday may be crucial for determining rate expectations. “The CPI report this week will be important for adjusting the Fed funds futures market.”

The fourth quarter earnings cycle for S&P 500 companies is about to begin, and earnings reports from the nation’s major banks are expected this week.

The employment report released Friday revealed a deceleration in pay growth, raising investor optimism. The report raised the possibility that the Fed may scale back its aggressive rate-hike campaign to combat inflation. This optimism might be dashed if inflation comes in higher than expected.